Administrative Law Judge Invalidates Fair Claims Settlement Practices Regulations by California Department of Insurance

Insurance companies could soon be off the hook for stiff penalties and fines imposed by the California Department of Insurance’s (“CDI”) for violations of the Fair Claims Settlement Practices Regulations (“FCPR”).  This is according to California Administrative Law Judge Stephen J. Smith, who recently issued a 51-page ruling finding the CDI’s Fair Claims Settlement Practices Regulations might not be brought as unfair claims acts.  

This ruling affects how the CDI has imposed penalties against insurers for claims since the inception of the FCPR in 1992. Since that time, only two cases have gone to adjudication challenging the procedure, and fines, as most insurance companies have chosen to settle. In both cases, the insurance companies -- an auto insurer and a life and health insurer -- retained Robert Hogeboom, senior insurance regulatory attorney with Barger & Wolen, to represent them.

In the most recent decision, Judge Smith’s ruling was based on the CDI’s Order to Show Cause (“OSC”) action alleging 697 violations against the five Torchmark groups of life and health insurers.

According to Hogeboom,

This ruling is an extraordinary indictment of the FCPR because for the past 20 years the CDI has required insurers to follow the FCPR under threat of an OSC proceeding and large fines."  

This may also result in changes to Market Conduct Examinations if they are to serve as the basis for an OSC proceeding.  

The decision will impact all lines of insurance regulated by the DOI.

Full Analysis of the Decision

On August 25, 2012, California Administrative Law Judge Stephen J. Smith, issued a 51-page ruling that found the California Department of Insurance’s (“CDI”) Fair Claims Settlement Practices Regulations (“FCPR”) may not be asserted as unfair claims acts. The ruling affects how the CDI has asserted penalties since the inception of the FCPR in 1992 in Order to Show Cause proceedings based on Market Conduct Examinations. Robert Hogeboom of Barger & Wolen represented the successful insurer, the Torchmark group of five life and health insurers, in the proceeding.

Judge Smith’s ruling was issued in the form of an Order pursuant to the CDI’s Order to Show Cause (“OSC”) action alleging 697 violations against the five Torchmark group of life and health insurers. The violations were based primarily on violations of the FCPR contained in § 2695.1 et seq. of Title X, California Administrative Code. The OSC was issued following the CDI’s Market Conduct Claims Examination which examined Torchmark’s life and health claims settlement practices principally through application of the FCPR.

On behalf of Torchmark, Barger & Wolen filed a denial of the allegations in the OSC followed by a Motion to Strike the FCPR allegations. The motion relied on California Government Code § 11506 to challenge the FCPR as improper to seek monetary penalties and a cease and desist order. A four-hour legal argument on the Motion occurred on May 25, 2012, before Judge Smith. In the court’s extensive ruling, which contained 150 separate findings, the court ruled that:

  1. None of the standards prescribed in the FCPR appear anywhere in California Insurance Code § 790.03 (pursuant to which statute the CDI adopted the FCPR); these are additional standards added exclusively by regulatory action of the CDI.
  2. The FCPR as applied are unenforceable pursuant to California Government Code §§ 11152 and 11342.2, which establish the test for determining the validity of regulations. Specifically, the court held that § 2695.1 of the FCPR improperly creates new unfair standards and duties within the meaning of Insurance Code § 790.03(h), which subjects insurers to the penalty provisions of Insurance Code § 790.035 for failure to meet those standards.
  3. The FCPR through CCR § 2695.1(a) dramatically and impermissibly expands the scope, nature and reach of the 16 unfair claims settlement practices set forth in Insurance Code § 790.03(h)(1)-(16). The court held that new unfair acts may only be promulgated by the legislature or through the process set forth in Insurance Code § 790.06.
  4. The CDI’s language in CCR § 2695.1 impermissibly amends Insurance Code § 790.03(h) such that a violation can be proved by means of a single knowing act or by proof of a general business practice, which amendment lowers the burden of proof and quality of evidence necessary for the CDI to prove a violation of § 790.03(h). In order to assert a violation of § 790.03(h), proof must be shown that the violation was both knowingly committed and performed with such frequency as to reflect a general business practice.
  5. An OSC drawn from the conclusions or statements in a Market Conduct Examination is improper to support a valid pleading. Such examinations lack specificity about each act. OSC pleadings must assert violations under Insurance Code § 790.03(h)(1)-(16) and pleadings must set forth the charges and allegations in ordinary and concise language, such that the acts or omissions of which the respondent is charged may be reasonably ascertained. 

Hogeboom’s observations on the ruling are the following:

  1. The ruling is an extraordinary indictment of the FCPR and how for the last 20 years the CDI has required insurers to follow the FCPR under threat of an OSC proceeding and large fines.
  2. The ruling will require the CDI to plead OSCs using pertinent facts relating to each specific transaction.
  3. The ruling may result in changes made to Market Conduct Examinations if they are to serve as the basis for an OSC proceeding.
  4. The ruling requires the CDI to show a general business practice as a condition for a violation of claims settlement practices specified in § 790.03(h)(1-16).
  5. The ruling also covers all Insurance Code § 790.03 unfair practices. Accordingly, this brings into question the validity of the § 790.03 penalty provisions in the recent regulation containing the standards for homeowners’ estimates of replacement value contained in CCR § 2695.183 and the long-standing broker fee regulations in CCR § 2189.5.

Because of the impact of this decision on the claims regulations and market conduct examinations, Mr. Hogeboom will hold a seminar on the background of the FCPR, the court’s decision and Market Conduct Examinations in the near future. Mr. Hogeboom is also available to meet with specific insurers at their home offices upon request.

For more information or for a copy of the ruling, please contact Robert Hogeboom at (213) 614-7304 or via e-mail; or Mr. Hogeboom’s assistant, Veronica Montero-Kossak, at (213) 680-2800 ext. 7204 or via e-mail.


No Attorney Fees Can Be Awarded for Non-Payment of Rest Breaks, California Supreme Court Rules

In Kirby v. Immoos Fire Protection, Inc., the California Supreme Court held that neither California Labor Code section 1194 nor section 218.5 authorize the payment of attorney fees in an action seeking recovery for denial of required rest breaks under section 226.7.

Section 1194 authorizes recovery of attorney fees by a prevailing employee on a claim for unpaid minimum or overtime wages. It provides for one-way fee-shifting to plaintiffs.

Section 218.5, by contrast, provides for attorney fees to be paid to the prevailing party in any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions. It is thus a two-way fee-shifting statute. However, it is also limited, since it does not apply to any action for which attorney’s fees are recoverable under section 1194.

Section 226.7 imposes an obligation upon employers to provide mandated meal and rest breaks.

Plaintiffs, employees of Defendant (“IFP”), sued the employer for nonpayment of mandated rest breaks, but subsequently dismissed this claim. IFP sought roughly $50,000 of attorney fees for successfully defending this claim.

The first question the Supreme Court had to address was whether attorney fees would have been recoverable under 1194. The Supreme Court found that fees would not have been recoverable under 1194, since rest breaks do not constitute a type of “minimum wage,” as Plaintiffs had argued.

The second question was whether, in that case, attorney fees were recoverable under the two-way fee-shifting of section 218.5. Here, it was IFP that argued that non-payment of rest breaks constituted a “wage,” and therefore qualified under section 218.5. Again, the Supreme Court disagreed. Rest breaks do not constitute wages of any kind.

Thus, the Court held, attorney fees were not recoverable in actions seeking mandated rest breaks under section 226.7.

What makes this case interesting (and a little ironic) from a procedural standpoint is that it was the defendant employer seeking the attorney fees, and the employee plaintiffs who resisted. Thus, in losing their claim for attorney fees, the employer ended by establishing law generally advantageous to employers. And in winning this battle over the payment of roughly $50,000 in fees, the employees essentially nullified the ability of future plaintiffs to seek attorney fees in actions based on the denial of required rest breaks.

Originally posted on Barger & Wolen's Employment Law Observer blog.

Emergency Regulation to Enforce Medical Loss Ratio in Patient Protection and Affordable Care Act of 2009 Made Permanent

On Thursday February 9, 2012, California Insurance Commissioner Dave Jones announced that he had obtained approval from the California Office of Administrative Law to make permanent the emergency regulation issued in 2011 allowing the Department of Insurance (the “Department”) to enforce the medical loss ratio guidelines in the Patient Protection and Affordable Care Act of 2009 (“PPACA”) (which we previously discussed here). 

As of January 1, 2011, the PPACA required all health insurers in the individual market to maintain an 80% medical loss ratio.

The Department obtained approval to make permanent its amendment to 10 California Code of Regulations § 2222.12 to reflect this requirement. A copy of the text of the regulation can be viewed here

This permanent regulation went into effect on February 8, 2012. 

The regulation adopted by the Department contains more stringent requirements than PPACA, as it allows the Department to evaluate whether the 80% medical loss ratio will be met at the time a rate is filed with the Department, rather than waiting until the end of the year to determine if this ratio was satisfied.

Originally posted to Barger & Wolen's Life, Health and Disability Insurance Law blog.

The California Supreme Court Reiterates Analysis for Determining Whether a Statutory Violation Confers a Private Cause of Action

Yesterday, the California Supreme Court issued its unanimous opinion in Lu v. Hawaiian Gardens Casino, Inc., in which the high court found that a specific Labor Code provision could not be enforced by private litigants. This opinion is important in that it reiterates important cases and analyses that can be used to defeat a plaintiff’s attempt to set forth a private cause of action where no such right was intended by the legislature. Unfortunately, however, the Supreme Court declined to further address the question of whether a statute that cannot independently confer a private cause of action can still be utilized as a predicate for a cause of action under the “unlawful” prong of the Unfair Competition Laws (“UCL”).

Louie Lu (“Lu”) was a card dealer at the Hawaiian Islands Casino in Southern California. As a dealer, he was provided tips. However, not all of the tips were his to keep. Instead, he was required to provide 15% to 20% of his tips to a community fund that was then split among other employees who were offering services to the card players, but were not as routinely tipped as the dealers (i.e., floormen, poker tournament coordinators, concierges, etc.)

The tip pool policy specifically prohibited managers and supervisors from receiving any money from the pool. This exclusion of managerial persons from sharing in the tips is important, as Labor Code Section 351 prohibits an employer from taking, collecting or receiving employees’ tips. However, California courts have long-held that the pooling of tips to be split amongst like-situated employees, such as waiters and waitresses on the same shift, is not a violation of Section 351. Similarly, courts have held that the pooling of tips in the casino setting when those tips are spread among the non-managerial staff is perfectly acceptable and not a violation of Section 351. Lu contended that “agents” of the casino (presumably managerial employees) were improperly sharing in the pooled tips, and set forth causes of action for violation of Section 351 and Section 17200 of the UCL. 

The trial court dismissed both causes of action. As to the Section 351 claim, the trial court found that the section did not provide a private cause of action, as the enforcement of that provision was explicitly provided solely to the Department of Industrial Relations. The trial court likewise found that the UCL claim must also be dismissed because Section 351 could not serve as a predicate for the “unlawful prong” of the UCL unless it could be enforced in a private cause of action, and since it could not, the UCL cause of action too could not be maintained. Lu appealed.

The appellate court agreed with the trial court that Lu could not assert a private cause of action under Section 351 itself. However, the appellate court disagreed with the trial court by finding that Section 351 could still afford Lu a private cause of action by using it as a predicate for the “unlawful” prong of the UCL. More specifically, the Court of Appeal held:

Nevertheless, Lu alleged a cause of action under the UCL for violation of Labor Code sections 351 and 450. “Virtually any law -- federal, state or local -- can serve as a predicate for an action under Business and Professions Code section 17200. The UCL is a proper avenue for Lu to challenge violations of these Labor Code provisions.

The California Supreme Court accepted Lu’s petition for review on the sole question of whether Section 351 itself afforded a private right of action – leaving the Court of Appeal’s ruling that the section can be utilized as a predicate for a UCL claim in limbo (as the entire Court of Appeal decision became depublished when the petition for review was accepted on the Section 351 issue). 

The Supreme Court’s opinion provides a lengthy analysis of why Section 351 does not provide a private right of action on its own; citing with approval a number of case (including Moradi-Shalal v. Fireman’s Fund, Vikco Insurance Services Inc.  v. Ohio Indemnity Co., Crusader v. Scottsdale Insurance Co. and Middlesex Ins. Co. v. Mann) that Barger & Wolen attorneys have utilized to argue that a plaintiff does not have a private cause of action for perceived violations of the Insurance Code, including sections 790.03 and 1763. The Supreme Court decision in Lu provides additional fodder to combat plaintiffs who seek to expand the civil enforcement of statutory provisions by the private litigants where no such right was intended. 

While the Supreme Court chose not to address the UCL aspects that were presented by the conflicting trial and appellate court decisions, that fight will surely return to California’s high court on another day.   

Barger & Wolen attorneys have significant experience is defending UCL claims in state and federal court, as well as presenting arguments against plaintiffs’ attempts to assert private causes of action based on Insurance Code statutes.